A friendly loan is one made between two people who know each other. These loans usually have very little documentation involved and generally don't affect the borrower's credit score. While typically intended to serve as more of a favor than a business agreement, there are still some basic steps experts generally recommend lenders follow to help protect themselves when entering into a friendly loan.
Friendly loans typically begin with a borrower requesting money from a lender. This is often as simple as asking for money from a friend or family member. The lender usually decides whether to give a friendly loan based on how well they know the person asking and the degree to which they believe the person can pay the loan back. This is in contrast to a typical bank-funded loan, where a formal application, supporting income documentation and a review of a person’s credit score must often be evaluated by the lending institution.
Once a friendly loan is approved, the terms of repayment are typically agreed upon verbally directly between the two parties. In many cases, friendly loans carry little or no interest. They may be paid back on a regular schedule over a set period of time, or the lender may agree to take payments whenever the borrower has extra money. Sometimes, a change in circumstances may prompt a borrower or lender to ask for a change to the repayment agreement. This is again usually done verbally between the two parties.
Payments for friendly loans are typically kept track of informally by the lender and/or borrower. In general, no credit bureau reporting is done. This means that payments made typically won’t go toward building a person’s credit, nor will payments missed negatively impact a person’s credit score, as payments for conventional loans usually do.
Due to the fact that friendly loan agreements are often made only verbally and there is no credit bureau record for them, they can be difficult to uphold legally. If a borrower refuses to pay the lender back, the lender may have a hard time proving the transfer of money was a loan and not a gift.
To help avoid this problem, experts generally recommend people offering friendly loans set up a specific, written repayment schedule and have the borrower sign an agreement stating the money is a loan and will be paid back according to the established schedule. Changes to the agreement should also generally be made in writing. Getting the agreement witnessed by an uninvolved party, such as a lawyer or notary public, can often strengthen the legal weight of the agreement should it need to be argued in court.
